The management of plastic packaging waste is advancing quickly, and new strategies are being implemented worldwide for better resource recovery. To assess the environmental benefits of new ways of handling plastic packaging waste, we need to first evaluate current waste management options in order to create a basis for comparison. In this study, the environmental impacts of plastic packaging waste handling are assessed for the first time in Iceland using the life cycle assessment (LCA) methodology. The results show that mechanical recycling, despite including the impacts of exporting the waste to different European countries, has more environmental benefits than landfilling the waste in Iceland. Increasing the recycling rates of plastic waste in Iceland is also identified as a promising option from a resource efficiency perspective. With better waste sorting, Iceland can become more environmentally sustainable, ensuring that plastic materials land in recycling processes, and thereby enhancing the flow of material in the circular economy.